Why 2010 will likely bring higher costs for your small business and what you can do about it

By Reed Richardson

While Congress and the White House are still struggling to craft a health care insurance reform bill that, if it passes, will mostly take effect in 2011 or later, many small business owners may wonder where health care costs are headed in the short term. The answer, perhaps unsurprisingly, is up, but not quite as much as in years past. Nevertheless, entrepreneurs may find that the expected rise in premiums forces them into some tough decisions about whether or not to shrink plan coverage, shift premium costs, or drop health care benefits altogether.

Historically speaking, health care costs kept in check in 2009, but still high

For 2010, the growth in overall medical costs is estimated to be 9 percent, according to a recent study by the accounting firm PriceWaterhouseCoopers. This figure is slightly lower than the increases seen in 2007 and 2008 (9.9% and 9.2%), but it still exceeds both inflation and real earnings growth by workers, a trend that has continued unabated for more than a decade. In fact, a Kaiser Family Foundation survey from this past September found that health care premiums have risen 131% since 1999, a rate three times faster than real wages and four times faster than general inflation.

What 2010's increase could translate into in actual dollars depends on your small business's individual situation, of course. But, based on the national average of $4,824 and $13,375 for single and family health care premiums, respectively, a 9 percent rise would equal an overall $434 increase on individual premiums and a more than $1,200 jump in premiums for employees who also insure their spouses and children through their employer-based plan. Although most small businesses require their employees to share in paying for these premium costs-in 2009, workers at smaller companies contributed, on average, 12.9 percent of their individual plan premiums and 31.4 percent for family plans-employers still could be facing increased costs in the neighborhood of hundreds of dollars per employee.

However, the study notes that there are two factors keeping the anticipated health care insurance costs for next year somewhat in check. "The recession and the prospect of health reform will help temper medical costs," it notes. But despite these downward pressures, the report notes that the health cost increases expected to take place will hit small businesses and individuals the hardest. This bodes particularly poorly for very small companies with between three and nine employees. This segment of the business sector has already experienced an 18% decline (from 56% in 1999 to 46% in 2009) in the number of companies willing to offer health care insurance over the past 11 years. (For all businesses with 10 or more employees, the percentage willing to offer health insurance benefits remained roughly unchanged during that same period.)

Should my small business opt out of providing health insurance altogether?

In the face of these increased costs, some companies may ponder whether or not they should continue to offer health insurance at all. After all, if paying yet another year of fast rising premiums puts your company's fiscal health at risk, it is entirely understandable for you to at least consider such a step, even if only on a temporary basis. Eliminating health insurance would undoubtedly remove a not insignificant-and easily measurable-overhead cost from your business's top line, giving your business a quick injection of much needed capital to your cash flow.

But before making such a move, it's also important to consider the less tangible, negative aspects, which show up as decreased morale, lower productivity, and-even in a recession where jobs are hard to come by-higher employee turnover at your company. Perhaps that's why the Kaiser study found that, despite the poor economic conditions, only 2 percent of employers reported themselves "very likely," and 6 percent "somewhat likely," to completely drop health insurance this past year.

Other cost-savings alternatives to consider

Though many small companies remain unwilling to take such a drastic step, it's clear that they are open to considering other ways to save money. The PriceWaterhouseCoopers survey noted that these same employers are increasingly willing to "push more of the costs of health insurance to their workers in 2010 while expecting more responsibility from workers for managing their personal health."

To achieve the former, the PWC report found that 42 percent of employers expected to increase their employees' share of premium contributions. Likewise, more than four in ten employers planned on making changes to their medical and prescription drug plans in 2010 to increase cost sharing by their employees. In addition, cost reduction strategies that involve a shift toward more consumer-driven (and consumer paid) health care plans, are growing more popular as well. According to the Kaiser study, nearly one quarter of all businesses said they would be very or somewhat likely to add health savings account-qualified high-deductible health plans (HSAs/HDHPs) in the next year. Similarly, one in five reported they were very or somewhat likely to implement high-deductible health plans with health reimbursement arrangements (HDHP/HRAs) in the near future.

Getting employees to take "more responsibility" for their own health care costs has prompted many employers to add wellness programs to their health care plans. And while surveys show that most business owners, and small business owners in particular, remain dubious about the efficacy of these preventative health measures, more than 57% of businesses with fewer than 200 employees (and 93 percent of large firms) now offer some kind of wellness program in conjunction with their health benefits, whether it be risk assessments, smoking cessation, nutritional counseling, weight management, or gym membership discounts.

The waiting game

As most experts point out, the health insurance landscape could be significantly changed within a few years depending on the direction taken by the legislative reform efforts currently underway in Congress. As a result, it might be wise to ride out the current economic storm and rising tide of health care premiums by taking a conservative, less-is-more approach. After all, by this time next year, small businesses could be enjoying a much more favorable economic climate and should know much more about where our nation's health insurance policy and its associated costs are heading.

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